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BASIC STRATEGY - VARIATION 4 – Skimpy version of 1
Before we go into specific applications of the basic strategies, let me
cover one more “basic” strategy, which really just a clever variation
of “Basic Strategy Variation 1”.
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In Basic Strategy 1, you would place your entry order at the price of
point B, and your stop at point A. The reason you use point A for
your stop is because that was the last low of the wave. Well, if you
think about it, once the price has crossed point B, even by just a
couple of pips, then you have just established a new high, we’ll call
it point D. In your trend, when prices dip back down (point E) you
should then establish a higher low. So therefore, as soon as your
entry order is entered as a trade you could then change your stop to
point C, as C has now been established as the last low. You
couldn’t program your entry order to have C as your stop because
until the price crossed B you couldn’t be certain what C would be; it
could have gone lower.
There is one important condition to using this variation. Point C
must have been at least a third of the way back down from point B.
This is important otherwise you stand a much higher chance of
getting stopped out. You don’t have to do any math, to determine
this. As long as it visually looks to have retraced a third of the way
back down or more then you can implement this variation. The
reasoning for this pertains to Fibonacci theory. It’s important that it
at least has bounced the 38% Fib level, and if it’s gone at least a
third of the way down it’s good enough. If you don’t understand
Fibonacci theory then know that it’s explained later in this eBook.
If your wave didn’t pull back at least a third then keep your stop at
point A, as in Basic Strategy Variation 1.
By doing this variation you dramatically lower the risk of the trade,
but you still aim for the same profit (say 20 pips). Now your risk to
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reward ratio is definitely better in your favor. The only downside to
doing this is that you now have a greater chance of getting stopped
out. With experience, gained through lots of practice, you’ll get a
feel for when to use this particular variation, and when to stick with
the standard way of “Basic Strategy 1”.forex sato
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